Aussie dollar turns villain for RBA as transition under threat

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03 August, 2017

The higher exchange rate is likely to contribute to subdued price pressures in the economy.

He said Dr Lowe's statement "effectively says that a stronger Australian dollar amounts to a de facto monetary policy tightening which threatens the RBA's growth forecasts".

Mr Farnham said the RBA was unlikely to raise rates this year, and the possibility of a further cut could not be dismissed.

"With the Australian dollar having rallied by 4ยข against the USA dollar since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were worried". The RBA said it expected annual gross domestic product of around 3% over the next couple of years.

They're expected to show continued solid jobs growth in the U.S. with 180,000 new jobs created in July and a fall in the unemployment rate, coupled with subdued wages growth.

The central bank kept its benchmark rate at 1.5% yesterday, as expected. Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens.

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Higher commodity prices, weakness in the USA dollar and some lingering speculation that the RBA might take a more hawkish view on policy are among the factors lifting the Aussie dollar.

There is also likely to be a short-term pick up in inflation, as measured by the consumer price index, as higher electricity and tobacco prices flow through.

Chris Schade, senior business analyst at non-major lender MyState, said that below trend economic performance and a high Australian dollar meant the current interest rate setting remained appropriate. A factor working in the other direction is increased competition from new entrants in the retail industry. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease.

AMP Capital's chief economist Shane Oliver said developments in North Korea and continued instability in the White House may also cause some uncertainty on the Australian stock market. Lowe said that growth in housing debt has been beating the sluggish climb in household incomes.

Lowe also hoped that non-mining investment would start to rise and the high level of residential construction would remain stable for some time, but advised that there are still issues going around the retail sector. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.


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